Technological development and the increased use of the internet have led to the proliferation of virtual communities. Some of these communities have created and circulated their own currency for exchanging goods and services. Bitcoin is currently the most popular among these virtual or digital currencies and has been in news recently because of the wild fluctuations in its ‘value’ and also significant venture capital investment in entities associated with it.1 Bitcoin is relevant in several areas of the financial system and is therefore of interest to central banks, consumers and investors. Digital currencies are part of a broader group of virtual currencies that include credit card points, air miles, loyalty points and coupons (Chart 1). With the advent of the Internet, mobile devices and detailed consumer information, companies are increasingly using digital currencies as a marketing tool. As a result, there has been a sharp increase in the use of digital currencies, particularly for app-based coins and tokens, mobile coupons, and personal data exchanged for digital content. As these trends evolve, digital currencies have the potential to become more popular and compete with traditional currencies. This paper aims to provide some clarity in particular on Bitcoin, its role and potential future use in the financial system and the risks associated with this form of digital currency.. It will begin by providing a short introduction to the Bitcoin network as well as describe the benefits of allowing the Bitcoin network to develop and innovate. It will highlight concerns for consumers, policymakers and financial regulators. Next it will analyze the role that Bitcoin could play in the financial system. The paper will conclude by providing recommendations to address policymakers’ concerns while allowing for further innovation within the Bitcoin network. An initial comprehensive overview of this kind is absent from the existing literature. This paper intends to fill that gap in the literature.
I employ vector autoregression to identify whether Bitcoin exchange volume shocks increase subsequent real Bitcoin transaction activity outside exchanges. This type of examination is not possible with traditional currency pairs on account of their lack of a perfect ledger mechanism like that of cryptocurrency systems. I find that increased exchange activity has asymmetric effects across user types, with exchange volume innovations tending to stifle the top 100 most popular user wallets than the remaining 2.9 million wallets, many of which are associated with gambling. If you suspect that the exchange activity is for anything other than speculative "hoarding'', the evidence should be found in the transactions between users, and its transmission is very weak. A very persistent response in the exchanges to news innovations was found and is a significant concern from a market manipulation standpoint. Dynamic multipliers were utilized to assess the degree to which money supply increases were distributed across wallet types via transactions. As the money supply increases, I find that the top 100 wallets tend to benefit in the form of increased transactions, while the effect for the millions of remaining wallets remains ambiguous.
What is Bitcoin?The aim of this paper is to answer the question of what — from an economic point of view — is Bitcoin. For this purpose, we make a literature review, discussing different views on the subject. Using the typology of money developed by Mises, we find that Bitcoin is a private fiat money, without, however, disproving the regression theorem. Based on the analysis, we conclude that the gold, which is a commodity money, would be a better candidate to serve as a global medium of exchange in a free market. Thus, we see the future of Bitcoin in payment system allowing to make low-cost, relatively anonymous and secure transactions, especially the foreign ones.
The Internet and other telecommunications systems have reshaped the means by which markets are accessed, generated, and transformed. Recent innovations in computer science have led to the development of a virtually bound, decentralized, encrypted currency system known as bitcoin. Unlike conventional currency systems, the Bitcoin protocol is cryptologically defined with a virtual structure that allows it to simultaneously operate as currency, commodity, and market shaping socio-political force. Its decentralized design permits it to function as a free-market response to fiat currencies vulnerable to inflation, regulation, and manipulation. Given the cultural significance anthropologists and other social scientists have assigned to various modes and mediums of exchange over the years, the socio-economic impact of this novel currency system warrants particular consideration. This research describes the Bitcoin community that has emerged alongside the currency, including the entrepreneurs, developers, and consumers who are dedicated to bitcoin’s perpetuation and acceptance as an internationally recognized medium of exchange. Ethnographic interviews and participant observation were utilized to collect information from users in the Central Florida area, detailing their experiences and interactions with the Bitcoin protocol and its associated community. This research provides new levels of anthropological insight into currency development, market interaction, and economically embodied social commentary. Moreover, its exploratory nature helps create a viable framework around which qualitative inquiry of virtual crypto-currencies may be designed in future studies.
This manuscript builds on my existing research program that (a) broadly seeks to analyze laws, regulations, instruments, and policy levers that inhibit a market’s ability to recognize an asset’s intrinsic value, whether in terms of financial, social, or human capital, and (b) explores and advances interdisciplinary corporate governance theories by employing a heterodox economic analytic to derive its proposal to the paradox of an unregulated virtual currency market (Bitcoins) and an overly regulated crowdfunding market (Kickstarter). The manuscript functions not only as an homage to Charles MacKay’s legendary 1841 book, Extraordinary Popular Delusions and the Madness of Crowds, which described the human, social, and economic psychology of financial bubbles — particularly the Dutch tulip bulb bubble — but also as an offering of problems and proposals that crowdfunded and Kickstarted entrepreneurial businesses, including those funded by Bitcoin currencies, present for a wide swath of societal stakeholders. To describe the problem, this manuscript (i) describes behavioral finance, (ii) details the new entrepreneurial business possibilities that virtual currencies and crowdfunded entities can explore, (iii) describes how current rules and regulations represent unnecessary constraints to traditional equity-based funding models and concerning governance models of entrepreneurial enterprises, and (iv) questions why one form of capital deployment (currencies) may provide equity-like returns and unique governance, while the other form of investing (crowdfunding), provides only soft-dollar-like returns and no governance for middle-class investors. While both virtual currencies and crowdfunding represent risks, including economic bubble risk, this Article believes that a heterodox economic analysis demonstrates unnecessary constraints on entrepreneurial businesses imposed by extant regulation, regulators, and law and policymakers. To assuage these paradoxic problems for emerging business enterprises, this Article proposes a minarchist heterodox solution of modest statutory language that requires market-based solutions that employ needed risk reduction strategies while redeploying necessary capital to private startup business enterprises. This proposal thus benefits the middle class entrepreneurs, suppliers of capital, and job seekers harmed by the current regulatory regime, while permitting for an expansion of the U.S. and global economies.
Sarah Meiklejohn, Marjori Pomarole, Grant Jordan, Kirill Levchenko · 7 authors
Bitcoin is a decentralized virtual currency whose usage has skyrocketed since its introduction in January 2009. Like cash, the ownership of bitcoins is anonymous, as participants transact bitcoins using pseudonyms rather than persistent real-world identities. In this article, we examine the limitations of Bitcoin anonymity and discover that the ability to cluster pseudonyms according to heuristics about shared ownership allows us to identify (i.e., associate with a real-world entity or user) a significant and active slice of the Bitcoin economy. Along the way, we explain a lot about how Bitcoin works.
Central to Bitcoin is its independence from any institution or government, allowing anyone to engage in a direct transaction at a low cost. So, what exactly is it, and how does it work?
Since its inception in early 2009, Bitcoin has attracted a substantial amount of users and the popularity of this decentralised virtual currency is rapidly increasing day by day. Over the years, an arms race for mining hardware has resulted with miners requiring more and more hashing power in order to remain alive in the Bitcoin mining arena. The hashing rate and the energy consumption of the mining devices used are of utmost importance for the profit margin in Bitcoin mining. As Bitcoin mining is fundamentally all about computing the double SHA256 hash of a certain stream of inputs many times, a lot of research has been aimed towards hardware optimisations of the SHA256 Hash Standard implementations. However, no effort has been made in order to optimise the SHA256 algorithm specific to Bitcoin mining. This thesis covers the broad field of Bitcoin, Bitcoin mining and the SHA256 hashing algorithm. Rather than hardware based optimisations, the main focus of this thesis is targeted towards optimising the SHA256 hashing algorithm specific to the Bitcoin mining protocol so that mining can be performed faster and in a more efficient manner. These optimisations take advantage of the fixed or predictable nature of the input stream of data in Bitcoin mining and various shortcuts are discussed to calculate particular rounds or message schedules that achieve the same computational results as off-the-shelf SHA256. Although these algorithm based optimisations can no longer allow generic SHA256 hashing, they are meant to radically optimise the process of Bitcoin mining. It has been claimed that if these improvements are to be implemented in mining devices, the double SHA256 computation reduces to a 1.8624 SHA256 computation which essentially means a faster hashing rate and lots of energy savings.
The human innovation in the field of monetary freedom takes shape in the virtual communities. Developed and implemented through a decentralized algorithm, the bitcoin project has so far proved itself a success in the field of virtual currency. Beyond the technical part of operation, in this paper we will analyse the theoretical principles underlying the bitcoin. This study shows that the bitcoin largely meets the role of natural money of gold and silver, in compliance to the free market’s behaviour. This allows us to observe the fact that people are aware of the negative implications the state’s intervention has in the monetary filed, thus deciding to create and use their own currency in online transactions.
This position paper discusses two related questions: 1. Using the framework of network economics, what are success factors behind the adoption of Bitcoin (a cryptographic curreny), and can we copy them for other protocols? 2. Can we design more successful protocols if we have inband payment mechanisms to internalize the externalities that emerge during adoption and in steady state?
Marcin Andrychowicz, Stefan Dziembowski, Daniel Malinowski, Łukasz Mazurek
Abstract. We show how the Bitcoin currency system (with a small modification) can be used to obtain fairness in any two-party secure computation protocol in the following sense: if one party aborts the protocol after learning the output then the other party gets a financial compensation (in bitcoins). One possible application of such protocols is the fair contract signing: each party is forced to complete the protocol, or to pay to the other one a fine. We also show how to link the output of this protocol to the Bitcoin currency. More precisely: we show a method to design secure two-party protocols for functionalities that result in a “forced ” financial transfer from one party to the other. Our protocols build upon the ideas of our recent paper “Secure Multiparty Computations on Bitcoin ” (Cryptology ePrint Archive, Report 2013/784). Compared to that paper, our results are more general, since our protocols allow to compute any function, while in the previous paper we concentrated only on some specific tasks (commitment schemes and lotteries). On the other hand, as opposed to “Secure Multiparty Computations on Bitcoin”, to obtain security we need to modify the Bitcoin specification so that the transactions are “non-malleable ” (we discuss this concept in more detail in the paper). 1
An innovative software technology known as Bitcoin makes it easier for software to operate with some degree of financial autonomy. In a meaningful sense, it is now possible for software to conduct business on its own account, without using the traditional financial system as an intermediary and without a financial existence tied to an existing natural or legal person. This Essay explores this possibility and suggests that legally autonomous entities, such as a limited liability company (LLC) with no members, are a useful legal structure for factually autonomous systems.
This paper will discuss and evaluate the design features of Bitcoin in relation to the libertarian and metallist philosophies that have shaped the cryptocurrency. Bitcoin has failed to be perfectly decentralized or particularly anonymous. Furthermore, its hyperdeflationary design features have made Bitcoin a currency dependent on outside, more stable currencies (e.g., the U.S. dollar), which serve as units of account. Finally, despite the view of money taken by its creators, this supposedly stateless currency is far from apolitical in nature. Although its creators tend to espouse apolitical accounts of money, Bitcoin has been from the beginning a political project -- an evolving, distributed constitutional project, with many goals, visions, and factions. Furthermore, depending on the shape of these political goals, Bitcoin advocates may or may not have a vested interest in creating mechanisms to stabilize the currency and make it a viable unit of account. This paper was written for Christine Desan's seminar, "The Constitutional Law of Money," at Harvard Law School.